Posts Tagged ‘oligopoly’

Another one bites the dust

July 2, 2010

The highly oligopolistic Australian supermarket industry just lost another multinational player.

South African grocer Pick’n’Pay (#143 on Deloitte’s list of global retailers by size) has sold off its Aussie holdings (the Franklins branded supermarkets) to our biggest grocery wholesaler Metcash.

Metcash (which was once South African-owned) supplies the very large network of 1000+ independently owned IGA stores. The 77 company-owned Franklin stores will soon be sold off to what are effectively franchisees locked into a supply arrangement with Metcash (now there’s a nice strategic play with respect to reduced bargaining power of buyers).

Franklins has proven a very tough company to run. It was sold off by Hong Kong’s Dairy Farm (#128) back in 2001 after they couldn’t turn a decent profit against the Woolworths and Coles behemoths.

Irrespective of the slow rise of Aldi and prospect of a Costco challenge, the rivalry in this market is mighty nasty for anyone without the big two’s economies of scale and reach.

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Not a good beer year

November 16, 2008

The merits of global scale and reach are an ongoing source of debate in the International Business world (among researchers and practitioners). On one side of the coin is an argument that operating across a range of markets should allow firms to build huge economies of scale (in terms of sourcing inputs, in R&D, in production, in distribution and in marketing). The counter argument is that the world is not really one big market, and that consumers will demand such different types of products, or infrastructure will differ so considerably, that the pressures to adapt will outweigh any gains from scale. Thus, we arrive at a potential trade-off between global integration and local responsiveness.

One industry that has seen substantial international consolidation in recent years has been beer. Several very large players have emerged, predominantly via cross-border acquisitions. The big idea has been that these firms would achieve the aforementioned scale advantages, and also tap into the growth in under-serviced markets in the developing world. The high population, fast growing BRICs have been a big target.

This Wall Street Journal (WSJ) reveals the difficulty these big brewers are facing with the current economic downturn. Folks are not drinking enough of the stuff, especially in these developing nations, where beer is a luxury good. This highlights one underestimated aspect of country difference – demand elasticity. Put simply, consumers in particular countries may be more or less sensitive to shifts in their income (and/or in prices). This is a far tougher issue for the multinationals to overcome, as it isn’t about their responsiveness, but rather an error in assessing the size and growth rate of the global market.

This has left these brewers wondering what to do next. A further aspect of internationalisation is the scope to arbitrage advantages across markets. Maybe they should be looking to acquire brewers in highly profitable markets with little competition, and then use these profits to fund further international growth. US/Canadian brewer Molson Coors has taken a tentative interest in Aussie firm Fosters. That shouldn’t surprise when you look at the profit data in the WSJ article – Australia was the 8th most profitable beer market in the world in 2007 and has none of the big global players involved. Looks like the big guns might want a taste of the oligoply action.